Scott E. Mollen

Foreclosures—Appellate Division Addresses Evidence Foundation Issues Involving Business Records— “Unprecedented Spike” in Foreclosure Actions After Financial Crises—Confusion About Procedural, Substantive and Evidentiary Law in Foreclosure Context

A defendant in a foreclosure action appealed from a trial court order which, inter alia, granted a plaintiff lender's motion for summary judgment and dismissed the defendant's affirmative defenses and counterclaims. The trial court, in essence, denied the defendant's cross motion to dismiss the complaint or, in the alternative, to compel disclosure and for leave to enter a default judgment on his cross claims asserted against the defendant Mortgage Electronic Registration Systems (MERS).

The Appellate Division (court) explained that “[i]n the wake of the financial crisis that began in 2008, the trial courts…have faced an unprecedented spike in judicial foreclosure actions. The challenges…have been compounded by poor record-keeping practices, a changing regulatory environment, inordinate delays, and inadequate legal representation. The…number of foreclosure cases has also resulted in a renewed focus on the relevant legal principles.” There has been “repeated confusion about…aspects of the procedural, substantive, and evidentiary law that must be…applied in a foreclosure context.” To provide additional “clarity,” the court deemed it “appropriate to…reiterate some of these foundational principles” in an effort to “eliminate many of the disputes” that seem to reoccur.

The court found that there were no “triable issues of fact as to whether the plaintiff has standing to maintain this action.” A “plaintiff establishes its standing in the mortgage foreclosure action by demonstrating that it is either the holder or assignee of the underlying note at the time the action is commenced….” The plaintiff had showed that it was “in physical possession of the note, which had been endorsed in blank, at the time the action was commenced.” The plaintiff also submitted an affidavit of its attorney's employee, which stated that “certain business records, which were maintained by her employer and attached to her affidavit, demonstrated that the plaintiff's attorneys were in possession of the original note endorsed in blank since August 19, 2011, a date which was prior to the commencement of this action….” The defendant failed to raise a triable issue of fact as in opposition.

Citing the “current version of the business records rule,” the court explained that a proponent must establish that the record was “made in the regular course of business— essentially, that it reflect a routine, regularly conducted business activity, and that it will be needed and relied on in the performance of functions of the business….” The proponent must also demonstrate that it “be the regular course of such business to make the record… essentially, that the record be made pursuant to establish procedures for the routine, habitual, systematic making of such a record….” Finally, a proponent must establish “that the record be made at or about the time of the event being recorded— essentially, that recollection be fairly accurate and the habit or routine of making the entries assured….”

The Court of Appeals has held that “unless some other hearsay exception is available, admission may only be granted where it is demonstrated that the informant has personal knowledge of the act, event, or condition and he [or she] is under a business duty to report it to the entrant….” A text on the subject had observed that “it will clearly defeat the utility of CPLR 4518 to acquire the testimony of all persons involved in the record….” Although “'the foundation for admission of a business record usually is provided by the testimony of the custodian, the author or some other witness familiar with the practices and procedures of the particular business'…, it is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted….” Thus, “evidence of the contents of business records is admissible only where the records themselves are introduced….” If the records themselves are not introduced, “the witness's testimony as to the contents of the records is inadmissible hearsay….”

The court found that the law firm's employee's foundational affidavit satisfied each of the requirements. Attached to such affidavit was an “accurate printout she made of the computer entry confirming the receipt… of the original note.” She had also attached a copy of the “original note to her affidavit, and affirmed that she had compared this copy 'to the original note which remains in storage under the custody of her team' and that the copy was a 'true and accurate copy of the original note.'”

The court held that the employee did not “need to demonstrate her familiarity with the record-keeping practices and procedures of the plaintiff, the original lender,… or MERS, in order to lay a proper foundation for admission of the business record attached to her affidavit.” She had laid a foundation for the admission of a business record maintained by her employer, the plaintiff's attorneys, and had not sought to lay a foundation for business records produced or maintained by any other entities identified by the defendant. “There is no requirement that a plaintiff in a foreclosure action rely on any particular set of business records to establish a prima facia case, so long as the plaintiff satisfies the admissibility requirements of CPLR 4518(a), and the records themselves actually evince the facts for which they are relied upon….” Thus, the court held that affirmative defenses based on the lack standing should be dismissed.

However, the court found that the defendant had raised an issue of fact as to whether he had defaulted in the repayment on the note. Plaintiffs may establish a payment default by “admission made in response to a notice to admit…, by an affidavit from 'a person having personal knowledge of the facts'…, or by other evidence 'in admissible form'….”

Here, the plaintiff relied upon an affidavit of “A” to lay a foundation for the admission of business records purporting to show that the defendant defaulted by failing to make required monthly payments on the note. “A” explained that she was a “document coordinator” for the loan servicer (“servicer”). “A” stated that according to business records she had reviewed, the defendant had defaulted by failing to make payments due on May 1, 2008 and thereafter. The court found that although “A” “adequately described the record-keeping practices and procedures utilized by (servicer), and adequately stated her familiarity with those practices, she did not actually attach or otherwise incorporate any of (servicer's) business records to her affidavit.” It held that to the extent that “A's” reported knowledge of “(defendant's) default was based upon her review of unidentified business records created and maintained by (servicer), her affidavit constituted inadmissible hearsay and lacked probative value….”

The only alleged business record specifically identified by “A” as demonstrating the defendant's default was a document dated June 16, 2008, which was annexed to “A's” affidavit. However, “A” had not specifically alleged that the servicer “created the document.” Moreover, “the document, on its face, indicates that it was created by (the original lender), and [“A”] does not allege that she was personally familiar with that entity's record-keeping practices and procedures.” The court noted “a proper foundation for the admission of a business record must be provided by someone with personal knowledge of the maker's business practices and procedures….”

The court acknowledged that “A's” “status as an employee of (servicer) does not necessarily mean that she is incompetent to lay a foundation for the admission of business records that were created by another entity….” As a “general rule, 'the mere filing of papers received from other entities, even if they are retained in a regular course of business, is insufficient to qualify the documents as business records…. However, such records may be admitted into evidence if the recipient can establish personal knowledge of the maker's business practices and procedures, or establish that the records provided by the maker were incorporated into the recipient's own records and routinely relied upon by the recipient in its own business…. Indeed, 'the reports of an independent contractor regularly relied on by the business may qualify as the business' record'….”

Here, “A” had failed “to attest to her personal knowledge of (the original lender's) record keeping practices, and failed to allege that the document that she had attached to her affidavit was incorporated into (servicer's) records and routinely relied upon by (servicer) in its business.” Accordingly, the court held that “A's” affidavit was “insufficient to lay a proper foundation for the admission of the document dated June 16, 2008….”

The court also noted that certain “factual assertions made by (“A”) in her affidavit…are directly contradicted by documents that she attached to her affidavit” and “contradicted by other portions of her own affidavit.” It found that such contradictions “raise issues of credibility” and “A's” affidavit “failed to eliminate all triable issues of fact” as to the defendant's default.

The plaintiff had submitted mortgage payment records. However, those records were not attached or incorporated into (“A's”) affidavit, and she did not identify those records or make specific reference to them. The payment records were “inexplicably” attached to the plaintiff's attorney's affidavit. Accordingly, the court held that plaintiff's motion for summary judgment on the claims against the defendant should have been denied.

The defendant had also argued, inter alia, that the plaintiff's “general denials of the allegations underlying his counter claims constituted judicial admissions that prove fatal to the plaintiff's complaint.” The court stated that “formal judicial admissions include facts that are 'admitted' by a party's pleadings….” However, to constitute a judicial admission, a statement must be “deliberate, clear, and unequivocable….” It found that “the plaintiff's general denials did not meet these criteria….” Since the defendant failed to submit proof of service or process on MERS, the court held that there was an insufficient basis to enter default judgment against MERS.

Accordingly, the court remanded the matter for new determination with respect to the defendant's cross motion to compel discovery and modified the trial court's order by deleting the grant of summary judgment to the plaintiff and for appointment of a referee to compute the amount due.

Bank of New York Mellon v. Gordon, Appellate Division, Second Dept., Case No. 2015-10709, decided March 27, 2019. Dillon, J.P. Chambers Miller and Duffy, JJ. Opinion by Miller, JJ. All concur.

Scott E. Mollen is a partner at Herrick, Feinstein.